House flippers often skip city permits

Real estate attorney Jeff Lerman stands at the entry to a duplex unit he bought in Tiburon from a flipper who had remodeled without city permits. Lerman brought it up to code.

Real estate attorney Jeff Lerman stands at the entry to a duplex unit he bought in Tiburon from a flipper who had remodeled without city permits. Lerman brought it up to code.

Photo: Liz Hafalia, The Chronicle

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Jeff Lerman walks to the patio of a Tiburon duplex he bought that was remodeled without permits. He brought it up to code.

Jeff Lerman walks to the patio of a Tiburon duplex he bought that was remodeled without permits. He brought it up to code.

Photo: Liz Hafalia, The Chronicle

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Real estate attorney Jeff Lerman shows one of the kitchens of a duplex he bought a few months ago in Tiburon, Calif., as rental property on Monday, June 17, 2013. Jeff bought it from a flipper who remodeled the duplex without city permits and inspections. Lerman fully replaced and remodeled both kitchens in compliance with the city of Tiburon, bringing electric and plumbing up to code. less

Real estate attorney Jeff Lerman shows one of the kitchens of a duplex he bought a few months ago in Tiburon, Calif., as rental property on Monday, June 17, 2013. Jeff bought it from a flipper who remodeled ... more

Photo: Liz Hafalia, The Chronicle

Image 4 of 4

Real estate attorney Jeff Lerman walks to the patio of a duplex he bought a few months ago in Tiburon, Calif., as rental property on Monday, June 17, 2013. Jeff bought it from a flipper who remodeled the duplex without city permits and inspections. Lerman fully replaced and remodeled both kitchens in compliance with the city of Tiburon, bringing electric and plumbing up to code. less

Real estate attorney Jeff Lerman walks to the patio of a duplex he bought a few months ago in Tiburon, Calif., as rental property on Monday, June 17, 2013. Jeff bought it from a flipper who remodeled the ... more

Photo: Liz Hafalia, The Chronicle

House flippers often skip city permits

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There's a surge in Bay Area homes being remodeled, as run-down foreclosures find new owners. Some of those new owners are house flippers, whose goals are to fix up and resell a property as quickly as possible. That can mean cutting corners by skipping permits and inspections for the renovations, city building officials say.

"Time is money when you're flipping a house," said Dan Marks, Vallejo's interim economic development director. "Especially in this crazy market when we have no idea how long this (house-buying) frenzy will last. Timing is critical for these guys, and going through the permit process takes time."

While non-permitted work is a perennial issue for cities, the sheer volume of dilapidated properties changing hands in recent years has spurred a big increase in unpermitted work, building officials say. The fallout can include slipshod construction standards, big headaches for new owners, and loss of revenue for cities. The problem is big enough that Oakland passed an ordinance requiring investors to register properties and comply with city rehab codes.

"With the volume of (remodeling) work increasing as it is, I would expect work without permits to follow," Ed Sweeney, San Francisco deputy director for permit services, said in an e-mail. "The developer who is flipping houses is under added pressure to bring a product to market. Since the work being performed is interior ... a sense of security is there" about not being caught.

Holding the bag

Short-staffed building departments throughout the region said they rely on complaints from neighbors to catch unpermitted work in process, although inspectors keep an eye out when they're driving through town.

"The house flipping is still going on here and we still find some in our travels performing inspections," Gary West, Vallejo's chief building official, said in an e-mail. "We have found contractors performing substandard work and converting unoccupied areas to living spaces. The new property owner is left holding the bag on getting the work legalized, which is sometimes a problem or not allowed."

One contractor was found working on 12 different homes with no permits, he said. In another case, an addition to a home had to be removed because it encroached on the house's front "setback" area, even though a recent purchase had included that square footage as part of the home's value.

Buyer beware

Jeff Lerman, a real estate lawyer in San Rafael, said he recently bought a Tiburon duplex from a flipper as an investment property. It had kitchen and bathroom updates that had been done without permits - but the seller disclosed that, as is required in real estate transactions. In negotiating the purchase price, Lerman factored in the cost of bringing the property up to code, and was able to work with the city after he bought it to bring it into compliance.

"A seller has the express obligation to disclose where there is any work that was not permitted as part of the transfer disclosure statement that is statutorily required in every sale of a one- to four-unit property in California," he said. Sellers who fail to disclose unpermitted work leave themselves open to fraud claims by the new buyer.

But suppose the seller does disclose the unpermitted work? "Then the risk is shifted to the buyer," Lerman said. "As long as the seller wasn't concealing anything, the seller's hands are clean."

A new owner who knowingly buys a property with unpermitted work "is responsible for any code violations should a complaint be made and an inspector find work without permit," said William Strawn, a spokesman for the San Francisco Department of Building Inspection. "The new owner would then be responsible for obtaining the permits to legalize the earlier work."

Cheap upgrades

New owners might also want to retroactively legalize the work, as Lerman did, to make sure the property complies with all current building codes - and to increase its value for a future sale.

"Being able to show a permitting history in the 3R report (the Report of Residential Building Record, a required document in transactions) adds value," said Mark Colwell, an agent with Redfin in San Francisco. "For every dollar you spend on the kitchen, you'll probably get $2 back" for work done with permits.

Still, he said, "unpermitted work is so commonplace that almost every transaction has some unpermitted work. People will go out and get permits for the big stuff like the sewer lateral and foundation upgrades, then will have $15-an-hour guys come in and do the kitchen without permits. They're trying to save a little money; it's always been that way."

Oakland is taking steps to make sure investors who buy foreclosures comply with building codes.

New Oakland ordinance

A new ordinance requires investors who purchase foreclosures to register the properties with the city and do all rehab work to city standards, said Margaretta Lin, strategic initiatives manager for the Department of Housing & Community Development.

"We're targeting investors who weren't planning to do the rehab work up to code," she said. "We know the foreclosure stock has a lot of deferred maintenance issues. If investors are buying a property that was in foreclosure, there's a high likelihood that it needs rehab work."

Besides flippers, the new law targets investor landlords to make sure they don't simply rent out run-down properties without bringing them up to code.

Some professional flippers said they are careful to comply with city regulations when renovating homes.

"We get permits because one, it's the right thing to do, and two, not getting them is a complete pain if you're caught," said David Waal, principal of Walnut Creek's Presidio Real Advisors, which flips houses. "For example, we had a property in Napa that was on First Avenue, in the county, and our contractor pulled a permit on the property with the same address - but it was First Street in the city of Napa. When he went to get the final (inspection), the inspector red-tagged him for not having a permit when he thought he did. Unwinding that mess costs us an enormous amount of costs and downtime to get the permits, redoing some of the work we did plus penalties."

Many experts said that prospective owners should safeguard their interests by doing research on properties before buying.

"We encourage any prospective home buyer to contact the city," said Suzanne Iarla, a spokeswoman for El Cerrito. "We are happy to share public information about a house - when it was built, when the most recent work was done with permits. We can say if any code enforcement work was done on the house or in the neighborhoods. We want to encourage more folks to call the city early on in the process."